Mezzanine Management Expands on the Continent

Mezzanine Management is significantly strengthening its operations and expanding its geographic reach in response to growing demand for mezzanine in Continental Europe.

The firm has recruited Steffen Lehmann, previously second-in-command at 3i’s Frankfurt office, as managing director of a new German operation in Frankfurt.

The group is taking a different approach in Italy, where instead of establishing a direct presence Mezzanine Management has signed a co-operation agreement with corporate financiers R&P/Rossi & Partners. Recently, Mezzanine Management’s London head office has added three new investment professionals (see page 26).

Historically, UK investments have formed the core of Mezzanine Management’s European business, alongside US investments with a significant European dimension. Since it began investing its current fund, International Mezzanine Investments (IMI), Mezzanine Management has been increasingly active in Continental Europe. Co-founder Rory Brooks reported that only three of the 16 assets currently in the new fund are UK investments.

Mezzanine Management’s first move onto the Continent came with the opening of a Paris office in 1996, the same year that the group closed the $225 million (ecu 205 million) equity tranche of IMI. Since then, Rory Brooks has spent much of his time in Paris, assisted by Natalie Faure Beaulieu, who divides her time between the London and Paris operations. Rory Brooks plans to return virtually full time to London within the next six to 12 months.

The group tried to adopt the same strategy in Germany, seconding managing director Ben Edwards to a new Munich office. Rory Brooks explained that Mezzanine Management discovered, as have many before them, that “cracking the German market with a non-German at the helm is hard work”. In this context, Steffen Lehmann’s extensive experience with German private companies is expected to prove invaluable. His view is that prospects for mezzanine finance in Germany at present are excellent. “In addition to increasing buyout and buy-in activity, which is often driven by proprietor succession issues, the increasing demand for capital from Germany’s Mittelstand is a huge potential market for the funds we advise”, he said.

Mezzanine Management has long informal connections with its new Italian partner, R&P/Rossi & Partners. Under the co-operation agreement, the corporate finance house will assist with deal sourcing and evaluation in what is acknowledged as a complex and difficult market for non-locals and will be encouraged to invest its own capital alongside Mezzanine Management in the deals it originates. The agreement is exclusive in that Mezzanine Management will not use other Italian firms for deal origination, and R&P will not work with other mezzanine providers.

Scandinavia and Continental markets, particularly Spain, where according to Rory Brooks Mezzanine Management has seen “sporadic” activity, will for the time being be covered out of the principal office in London.

Virtually all of IMI’s equity tranche has now been used, and Mezzanine Management is in the process of closing a $125 million debt tranche for the vehicle. IMI is permitted to raise as much as $225 million of debt facilities.

However, rather than gearing up the fund to the maximum level allowed, Mezzanine Managers may choose instead to return to the fund-raising market. The final decision will take into account the preferences of existing investors.

Discussing the increasing prevalence of high-yield bonds in the European markets, Rory Brooks said Mezzanine Management, which normally focuses on companies below the realistic threshold for high-yield finance, expects them to have a beneficial long-term impact on the market for conventional mezzanine in Europe. “In Continental Europe, the use of capital markets in general is still grossly underdeveloped. With the advent of European Monetary Union and greater harmonisation, we expect this to change. As more large European companies tap the public markets for high-yield funding, the trickle-down effect should greatly stimulate our target market, as smaller, often family-owned companies come to realise the potential leveraged capital structures have for enhancing equity returns”, he said.

Rory Brooks said Mezzanine Management now views its market as “pan-European with a transatlantic element as well”. The additions to the business, he explained, are intended to provide “the resources to capitalise upon the many opportunities this whole market will provide over the next few years”.